In fact, Fidelity
fired four employees back in 2009 for participating in a fantasy football league.

But your company's gambling rules aren't the only thing you have to worry about. Your March Madness office pool might be illegal.

Legality of workplace gambling

The legality of workplace NCAA bracket contests in offices depends on
state law, and each state differs.

"In some states, if no one is receiving compensation for conducting the contest, it is legal. In other states, it is a form of prohibited gambling regardless of whether it is conducted for profit," says Anthony Cabot, a Partner and Practice Group Leader of the gaming law group for
Lewis and Roca, LLP.

So check your state laws before you start your office pool, and don't take a cut for conducting the contest.

In the Federal workplace, gambling for money or property is strictly prohibited.

"Federal rules on gambling prohibit employees from gambling while on duty, or while on government-owned or leased property, unless necessitated by their official duties," according to the
National Institutes of Health Ethics Department.

Can you be arrested?

"As a practical matter, these office pools are not often the subject of criminal prosecution in states where it is illegal," says Cabot.

But that doesn't mean that you're out of the woods.

In a worst case scenario, in states where it's illegal, Cabot says that persons operating and playing in the pools could be arrested.

He notes that these laws are typically enforced by the local police, but that other agencies can have jurisdiction as well.

Paying taxes

Technically, you're supposed to report all of your gambling winnings to the
IRS, according to Daszkal.

Recreational gamblers, like most participating in an office pool, are required to report gambling winnings as "other income" — Line 21 — on Form 1040.

Of course, losses from gambling activities can be used to offset winnings in most cases, says Cabot.

But, he notes, you'll need to keep good records.

"If you itemize your deductions, you can deduct gambling losses that you had during the year, but only up to the extent of your winnings. That's what the law is," says Daszkal.

Gambling losses can be claimed on Schedule A under "other miscellaneous deductions."

What happens if you don't report?

"The consequences are that you pay the taxes, you pay interest and you pay penalties," says E. Martin Davidoff, tax attorney and CPA at
E. Martin Davidoff & Associates.

He says that for the normal office pool, you're talking interest and a 20 percent penalty on the tax for inaccuracy, if there's an IRS audit.

But Daszkal notes that the IRS doesn't seem to be very aggressive about this.

Still, he warns that it's important to be cautious when it comes to workplace gambling and dealing with the IRS.

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